Peak Oil Is Coming, Courtesy of Political Incompetence

Before starting today’s essay, I have to thank Rick Rule of Global Resource Investments for his insights on the following issues.

Rick has been involved in natural resources investing since 1974. He founded Global in 1994 and has been behind many of the largest deals (Silver Standard being one) and the largest profits (between 1998 and 2006 he grew $15 into $460 million) the industry has ever seen.

I spent the better part of a recent morning discussing oil and the energy sector with him over the phone last week.

“Most people believe that most oil in the world is produced by the big oil companies, the Exxons, the Shells, the BPs, the Totals of the world,” Rick began, “That is not true. Most oil in the world is produced by national oil companies… companies owned by the state or government.”

I asked Rick what percentage of world oil production is controlled directly by governments. His answer: “at least 70%.” Rick went on to explain that this creates a situation similar to the Peak Oil theory based not on lack of resources, but lack of competence on the part of political leaders.

“Much of the cash flow generated by these state owned companies is spent on government spending programs. Now, oil and gas are capitally intensive businesses. If you do not continually reinvest, you impair your ability to produce.”